End Federal Student Loan program?

In Wednesday night’s Republican debate, one question asked was regarding student loans.  This is one of the big complaints coming out of Occupy Everywhere: students wanting their loans paid off/forgiven.

Yet, we see how the loan program has poisoned the education system. It has allowed extreme increases in tuition, allowed students to study less (13 hours/week now versus 25 hours/week in 1960s),  allowed students to party more, and to extend their programs from a 4 year program to 6 or more years.  Or they borrow tens of thousands for a program that cannot provide them with a future job that can easily repay the loan (are you listening Harvard University Elizabethan Literature students?).

Not only that, but they obviously have time to rampage in the streets anytime their college sports team wins, loses, or has the coach fired (Penn St firing Paterno after the child molestation scandal).  We are raising a bunch of spoiled, rotten kids, who want everything handed to them on a silver platter – for free!

Neal McCluskey at CATO gives us his take on why we should end the federal student loan program. And I agree.

26 thoughts on “End Federal Student Loan program?

  1. I would not have been able to go to college without the federal student loan program. Because I was able to go to college, I have a career where I can make a living wage.

    I think that the high cost of education needs to be addressed. Tuition increases have far outpaced inflation. Why is that?

    I believe that there needs to be more moderation and more emphasis on learning a trade. Not everyone is meant for college.

    In terms of the protests, there were many protests in the 1960s before the student loan program was fully available. Those were due to the Viet Nam war – but the fact remains that most young adult Americans love a protest.

    While there may be examples of some students who want everything for free, I think the vast majority just want a chance to work hard and be productive.

  2. There might be good reasons for ending federal student aid, but a riot at a state university is not one of them. Since when did libertarians favor collective punishment in any form, much less the extreme overreaction posited here?

  3. The student loan program is the primary reason that college costs are increasing. If you subsidize something you will get more of it. If the government gives people more money for college, there is more money in the marketplace pursuing the same good. A greater supply of money in the marketplace causes an increase in prices for the good that is being subsidized. So, if you want college costs to go down, the best way is to end the subsidies, ie, student loans.

  4. However, economics literature does show that education has a benefit both for the individual educated but also has benefit for the greater society. (From improved finacial circumstances to families, improved technology, better informed voting, improved available work force, etc.)

    Thus, so goes the economic theory, to find the maximum level of benefit for society, you’d want to encourage people to get an education above and beyond what the uninterfered market would create on its own because individuals will not take into consideration the societal benefits of education, only the personal ones. So the capitalistic system will fail to find the maximum level of benefit if left by itself. Loans are an effective way of compensating for that failure in the captitalistic system.

    Yes, they also have the downside effects just mentioned. These are not mutually exclusive points of view. And they are both right.

  5. The Cato article begins with the headline, “Is This What PA Taxpayers Shelled out $279 Million For?”

    And it’s a very good question—what do taxpayers get for their investment? The only problem is that the accompanying caption and text make no attempt to answer that question. Instead, the author choose to take the actions of some students as representative of all students. Various news accounts make the claim that “more than one thousand students” protested at Penn State—this out of over 40,000 enrolled at that campus, and of course the definite fact that absolutely no non-students joined in the protest, right? I mean, there’s no way that the surrounding population of 12 million people contributed anything to the protests.

    I might ask of the article, “Is this what thousands of years of civilization developed written language for?” and conclude that since the article is moronic, written language should be eliminated.

    I think aerin, comment #1 comes much closer to reality: most students use college as a necessary step toward becoming employable in a well-paying and personally-satisfying job. It is very true that many majors do not, in fact advance one toward that goal. Trade and technical schools would better serve many students, some students seeking professional degrees (e.g., medical school) should be allowed to skip the college years altogether, etc.

    Do subsidies feed into the problem? Sure. But there are other driving factors; e.g., the “resume inflation” that happens throughout businesses who look for college degrees instead of work-related qualifications (I worked for several businesses that required a BA/BS for some levels of lower management and an MA for all upper management—without any consideration of what field the degree was actually in—hello Elizabethan Literature baccalaureates).

    But even while I agree that subsidies feed into the current problem, I don’t think they do so inevitably. One reason that so many students drop out (the stat was mentioned in the Cato article as proof of point, but here again was not really addressed) is that they come to realize that for them college is a waste of time. If more pre-college students could be helped to appreciate the actual role that college will play in their lives then they will make other choices—trade school, apprenticeship, employment—that will drive the demand for reform at colleges. This, I believe, would more effectively improve the state of higher education in this country than would eliminating loan subsidies that help the millions of students who go to college, work hard, obtain an applicable education, and go on to employment that supports the US economy.

  6. Ending government-back student loans does not mean ending student loans. If there is a need, and people who can pay for it, supply will appear. If the government announced it was leaving the student loan business tomorrow, student loans would still exist. Banks would make the loans based on true risk-reward calculations. People would still have 25 years to pay back their loans. Their interest rates might be higher. But the key would be that college costs would come DOWN, so, over time, they wouldn’t need the huge loans they need today.

    One of the things that the Church perpetual education fund shows is that private charities, like the Church, will step in if the government steps out. This brings the giver closer to the person receiving the charity.

    Back in the last century when I went to college, I paid for a private school myself with a small amount of help from my family. I received grants and loans from mutual aid organizations (Lion’s, Elks, Rotary, etc). And I took out PRIVATE student loans, which I paid off in full within two years of graduating.

    If we want to know why this would seem impossible today, we need to look at why college is so expensive today. And the reason it is so expensive is the government subsidies such as student loans, which encourage universities to become country clubs with massive bureaucracies rather than focused, efficient centers of higher learning. End government backing of loans and you go a long way toward solving the problem.

  7. I’m with Geoff here. The Federal government has no Constitutional authority to use taxpayer money in this manner, and so Federally funded student loans are illegal under the highest law of the land. In addition, I believe that they are partly responsible for the rising costs of tuition, along with Pell grants and other government subsidies. This is especially true of Pell grants—whenever a third party is footing the bill, prices will always increase. Direct contact between the consumer and the provider is the surest way to drive prices down.

  8. LDSP,

    The ‘authority’ issue is a separate issue from whether or not there is societal benefit due to a market failing.

    Geoff,

    Help me understand your position. (Bear in mind that I’m just repeating econ 101, not stating my own position. In fact, I have no position on this issue.)

    Are you denying that education provides societal benefit above and beyond personal benefit (and is thus invisible to the market)? Or are you accepting that is true but denying that it’s worth it? I do not see those as equivalent positions.

  9. I don’t know that privately funded money would really make up for government loans. Making those sort of loans is not something that comes easily to every institution out there. It either requires contracts and management, or an honor code based on a shared morality. Obviously, the latter is not common anymore, and the former is going to be expensive.

    As long as we believe that everyone needs a college education to be successful, as long as we believe that success is accumulation of excess assets, as long as a majority is pursuing that accumulation, the problem of depreciating educational value is not going to be resolved.

  10. I take it as a given that if the government got out of the student loan business (taking their protective laws with them), that private student loads *would* go up, but not enough to take up the slack. That’s the economical predicted outcome based on our current understandings of how economies work.

    That’s the whole point: if it’s true that education has societal benefit outside the individual, then the ‘natural state’ for private student laws *should* be lower than when the government is involved.

    The only way this point of view could be wrong is if in fact there is no societal benefit for education on top of personal benefit or if the negatives of governmental supplied education via loans is actually equal to (or greater than) the benefits of education. But if we agreed upon the benefits and disadvantages (which we probably wouldn’t in real life) it should be simple math. It’s an easy economic problem to be solved.

  11. Also, according to economic theory, having the government ‘get out of the business’ *should* drive prices down. But again, according to the theory, it would not be enough to compenstate for the additional people getting educations due to cheap loans.

    If this wasn’t true, then we’ve basically proven education has no societal benefit above individual benefit and, by proving that, the case is clinched for government getting out of it.

    The *only* rational and moral reason for the government to give out cheap student loans and pell grants would be if education really does have societal benefit beyond individual benefit.

    (Well, I suppose some would argue there is moral benefit in reducing classes, or something like that in the case of poor people… but I’m not going there.)

  12. Bruce, a few points.

    Yes, providing govt subsidized student loans and Pell grants allows more people to go to college. There are several significant issues with this.

    1)As I say above, anytime you subsidize something, prices go up. This is why college costs go up 7 percent a year while inflation goes up 2-3 percent a year. So, providing student loans does not deal with the underlying problem, which is raising cost of college, it actually contributes to the problem.
    2)There are some societal benefits with more people going to college, but there are also a lot of societal problems. Does society benefit as a whole when *everybody* goes to college? Obviously not. Bill Gates, Steve Jobs and Mark Zuckerberg all dropped out of college. Would we be better off if they had gone to college for four years, yes or no? Does society benefit when a middle class person goes to college for six years to get a masters in gender studies and then graduates with $100k in debt and cannot get a job? Would society benefit more if that person had instead gotten an associates degree in computer programming and graduated making $60k a year and then took night school to get a bachelor’s? It is easy to see that federal student loans encourages some behavior that harms society more than helps.
    3)We cannot get away from the moral/ethical issues involved here in forcing some people who don’t want to to pay for the student loans of other people (which is what is happening when you have Pell Grants and govt student loans). Nothing is free. Your taxes and mine are paying for these subsidies. I am morally opposed to paying for things like this. Why should I be forced to pay for things that I don’t agree with?
    4)Government cannot pay for everything, even if you could prove that there were more of a societal benefit than societal detriment. There are all kinds of things some people would “like” government to pay for. It would be great if the government would build everybody 4000 sq ft homes and buy everybody a Mercedes and a yacht. We don’t have the money for it. There is more than $1 trillion is student loan debt out there. The government already has $15 trillion in debt. Who is going to pay for the student loan defaults as they continue to flood in? Right now, we are borrowing money from China and Japan to pay for these debt. Do you think that can continue indefinitely?

  13. When I took out my student loans 14 years ago, they were thru a private bank. Some were subsidezed, some were not. I couldn’t have gone to college w.o them. However, I do see the subsisidy as the root problem of the high cost of tuition. The real problem is how do you wean the colleges off the teat of government? How do you totally change the system? It seems like anytime anyone tries to change any sort of entitlement system — to save the overall system, the moaning and groaning commences, fluffy bunnies die and nothing gets done. In the end, I do think, if you are going to take out loans better do it wisely and for something that will land you a job that can pay you back (Harvard Elizabethan Literature Students). I have ABSOLUTELY ZERO sympathy for the Occupy crowd that want their loans forgiven. Go and work hard, live simply and pay your loans off — that’s part of being an adult.

  14. I think if we eliminate federal loans, we force the schools to reduce their prices in order to maintain higher numbers of students.

    Another method is that many jobs will help subsidize one’s schooling. I know many students who work at Fedex or UPS, and receive tuition reimbursement. I served in the military, and had much of my schooling paid for in that manner. I worked my fulltime job, then studied at night/weekends.

    Then, there’s another issue here. Right now, I could attend my alma mater (Troy University) or the internet university WGU, for about $5-7000 per year. But many students are going to high cost private universities with giant loans that they ostensibly cannot pay back even over 25 years. If loans were privatized, people would feel more responsible towards paying them back, rather than thinking the government owes them a living, and they can just ignore it. Finally, private loans can be processed through bankruptcy if necessary, so it does not have to be an albatross around someone’s neck when things get very bad.

    With such a system, people will be more careful in the degree they choose, and the school they attend. Prices would drop, becoming the great equalizer. And requirements for degrees may change, as half of a baccalaureate are classes they never will use (Music Appreciation? really?). We should redesign degrees towards the program (Engineering, Medicine, History, Arts, etc) and not require all the extra courses that pad the bottom line of the university, keep unneeded teachers and administrators employed, and loans so high. Imagine shortening the requirements so it is a 3 year, rather than a 4 year degree. Or increase the number of classes in the degree area, so we’re actually producing better prepared students for their field.

  15. I do agree that a more streamlined degree system would be better. I am forever thankful I got out of BYU having never taken American Heritage — thank you AA degree from CommColl, and I can truly say the philosophy class and Greek lit class I had to take for my major were a total waste of time. I did work as well thru college, I think that’s why my sympathy for the Occupy crowd is low — I left every morning before 7am, took a bus to work, studied in the afternoons, did homework at nites and so on. My job paid my living expenses, thankfully, I only ever had to use my loans for tution and big things like getting my wisdom teeth pulled.

  16. Joyce, I too attended BYU. I managed to complete a double major in three years (including American Heritage!) and did it debt free by qualifying for scholarships and working the night shift (my parents offered moral but not financial support) for 32–40 hours/week.

    So I suppose from my perspective I could consider anyone who took out loans for having taken the easy way out, but instead I can easily understand that 1) not everyone has the stamina to spend several years working 4 or 5 nights each week instead of sleeping; 2) money available for scholarships is not available for all who desire a post-secondary education and 3) sometimes there are better things to do with your time than work a more or less menial job.

    As for loan forgiveness, the issue is not one of laziness but the fact that, unlike pretty much all other debts, including those incurred through irresponsible consumption and other morally questionable behavior, federal loans cannot be discharged even if you are bankrupt.

  17. @ Geoff in #12.

    Geoff,

    You make a lot of points, but all of them could all be 100% true and it might *still* be the case that the societal benefits for increased levels of education due to government subsidies of various types (i.e. loans, reduced and supplemented tuition, GI Bill, etc.) produces some objective, measurable, and overwhelming societal benefit that makes it overwhelmingly worth it.

    You are dealing with a well thought out economic claim (i.e. education increases yours *and* your neighbor’s wealth, so the capitalistic system is blind to the ideal educational level for society and won’t find it on it’s own). Even given the anecdotal responses you’ve included here, I’m at a loss to understand what your position is on the above claim.

    Let me use a few examples from what you said to explain why it fails to clarify your position:

    #1: The question is not if federal loans raises the costs or not. It does to some degree. You state this “is the problem.” By itself, how so?

    This is actually a matter of economic math. Suppose education is, say, 40% more expensive due to government subsidies, but also 30% of the workforce gets a university degree that wouldn’t have had there not be federal subsidies. Further, assume that due to this increased education they become 5 times more productive in the work force. Given such (made up for the sake of argument) numbers it’s an easy economic choice for society to subsidize education to some level. Failure to do so would lower the overall economic well being of the nation even as it reduced the cost of education by 40%. It’s just not worth it.

    It’s a situation like this that you need to address. Are you claiming this isn’t the case? Okay, fair enough. But simply telling me educations prices are higher with subsidies misses the point entirely. (Here I’m assuming we are calling Federal student loans is a sort of subsidy.)

    Now obviously you can make up your own numbers. You might, for example, claim that, had there not been federal loans, then 97% of the University degrees would have happened anyhow but at 40% less. Given such numbers, obviously, federal loans are a net negative. But then you’re making a specific (and testable) claim that I can understand and seems relevant to the question at hand.

    Also, consider that ‘federal loans’ is being treated as a subsidy. For the sake of argument, let’s assume that’s a fair characterization. However, it’s hardly the only type of governmental education subsidy out there. I could also ask the question “if state governments did not subsidize tuition at State Universities, would education be cheaper?” And I suspect the answer is “no.” So I suspect that governmental subsidies to education are often worth it. (If not, perhpas, federal loans.) What is your position?

    #2: I do not understand the relevance of your examples of some really rare cases of people that dropped out of college went on to be highly productive. What relevance does this have to whether or not education raises over all wealth for society beyond individual wealth? I’m afraid I do not understand your point here. Unless you are making the dubious claim that if we had more people drop out of college we’d have more Bill Gates out there, I doubt there is a point here at all. My suspcion is that you were throwing around an emotional story for effect.

    I also suspect even you would agree that *on average* education does increase overall work force productivity and societal wealth. (How in the world could you deny something so obvious?) Or do you disagree that this is the case?

    Likewise, so long as education is available, some people are going to waste the presented opportunities. You made up the case of a person that, had there not been federal loans, he/she would have gotten a productive associates degree with low debt but instead (due solely to the existence of federal loans) they ended up with 100k debt in gender studies and had an unproductive career. But simply making up a case like this doesn’t seem at all relevant to the questions I was asking you. Are you claiming this is so common it undermines the productive benefits of the increased levels of education in the population due to loans and other subsidies? I’m not clear if this is your argument or not.

    The issue here is that the argument you are using is only relevant if there is a large number of people that were *going* to get a low debt but productive associates degree but suddenly instead decide to go get a 100k debt gender studies degree due of the availability of pell grants or federal loans or other subsidies. In fact, this number must literally be high enough to offset the additional productivity and wealth created by the increased level of education of the work force. Are you arguing that this is the case? Or were you just bantering about marginal counter cases? Please clarify.

    Again, this is simple economic math and should be testable either way. For example what if 50% of students will waste 100k on gender studies when, had there not been cheap federal loans available, only 3% would have? If this is the case, your examples were spot on and you’d be correct.

    But what if the numbers are more like 2% of students go into gender studies and get 100k in debt now and only 1.9% would have had there not been federal loans available? Personally, I suspect that the second case is closer to the truth. What is your real argument here? Are you saying you believe that the first case might be closer to the truth? Without further explanation, it’s difficult to make sense of your arguments here.

    #3: I have no doubt that you have moral issues with student loans. Okay, fair enough. Do you also have moral issues with State Universities? With public schools? With national defense? With police forces? With paying judges? With GI Bills? With any sort of mandatory taxes?

    The fact that you feel you are being forced to pay for something you disagree with is a fair point, but one that is common to the plight of all tax payers. But in any case, it seems to me that this alone isn’t a sufficient logical argument. In essence I’m asking you to ‘tell me where you draw the line’ and you are responding with “I don’t like the current line.” But I already knew that.

    Isn’t it fair for me to then ask “Geoff, please explain to me *why* you dislike or like something.” Isn’t that, in a sense, what I’m asking you?

    #4: “Government cannot pay for everything…” No, they cannot. That’s why they have to choose what the best things to pay for are. Which is what we’re discussing, right?

    Was someone claiming that if we subsidize education that morally that means we have to buy yachts for everyone? That comment must have been deleted, because I can’t find it. ;)

    Likewise, I’m guessing that there are a lot of people out there that would agree with the idea that education has societal benefits and that buying a yacht has none at all. Since we’re specifically talking about ‘societal benefit’ your yacht example seemed to come out of the blue here and I can’t figure out what relevance it had to the discussion.

    Further, are you arguing that a balanced budget would require removal of all education subsidies? This seems like a pretty wild claim to me. It seems like education subsidies would be a fair part of any successful balanced budget.

    Consider that removing all government education subsidies would mean the end of the State University system. I suspect most people would consider moving to only private universities (and thus no government subsidies at all) probably isn’t a recipe for long term success. Are you arguing that it would be? Maybe. And that’s fine if that is what you are arguing. (And I think LDSP would make that argument!) But it’s less than clear to me if this is your claim or not.

    Simply pointing out that we are in debt does not logically lend itself to the assumption that we need to end all education subsidies. It’s like claiming that because a household is in too much debt due to eating out that they should stop shopping for groceries to get out of debt. Presumably we need to figure out what the right things to cut are. Cutting education might be also cutting revenue, for example. I’d like to understand what your real position is here.

    So I go back to my original question you were responding to. Are you saying you believe it is not true that education has societal benefits? Or are you arguing that it does, but the negatives are larger than the positives? Or are you arguing something else?

  18. I think that the high cost of education needs to be addressed. Tuition increases have far outpaced inflation. Why is that?

    I think student loans is part of that, but the bigger issue is that what people demand from college now includes things quite independent of education. i.e. nice facilities. Finally there has also been an increase in the bureaucracy at colleges and all those extra bodies costs money – not to mention the pay for things like President are increasing in cost.

    The other problem is that there are so many legal restrictions on private business testing hiring applications or employees that companies use college degrees as a signal. Thus more people go to college, driving up the cost, simply because that’s a safe way for companies to have some idea about employees (even though it’s ultimately not a good one for the majority of employers).

    My personal feeling is that the government should stop issuing student loans and instead simply directly subsidize public university costs. That should drive down tuition at those colleges and thereby put an equivalent decreasing pressure on private university tuition.

  19. demand from college now includes things quite independent of education. i.e. nice facilities.

    I demand a Lamborghini too, but alas, I don’t I have the money.

  20. I really like the German method of schooling. They have graduated education paths for people based on their intelligence, aptitude, and preferences that start when only 11 years old. The education is free, but is tailored for the career, no more, no less. And while doctors make more than cashiers, the pay isn’t quite as disparate as it is here.

  21. “Direct contact between the consumer and the provider is the surest way to drive prices down.”

    Yep. We used to pay the doctor directly for treating us. There was no middle man. When we stopped doing that, healthcare prices started going UP UP UP.

  22. “Direct contact between the consumer and the provider is the surest way to drive prices down.”

    Actually, I used to have an HSA. I’m still totally sold on them as a concept. They are a massive pain, especially right now because no on has them and Doctor’s don’t know how to deal with them. But if everyone has an HSA, health care costs would take a nose dive.

  23. “I really like the German method of schooling”

    There are pros and cons to that approach. Let me just say that I am glad that my lot wasn’t cast at the age of 11.

  24. Health care costs would drop significantly if we did one of the following things:
    (1) Equalize the tax treatment of health insurance costs between individuals and employers, so that we have a healthy individual insurance market.
    (2) Or even better, remove the special tax treatment for (non-catastrophic) health care expenses completely.

    The second option is harder to accomplish, but would be much more effective. The way to get it done politically is make it part of overall tax reform that eliminates deductions and lowers rates. The mortgage interest deduction and the state/local income tax deduction must go as well. One subsidizes big houses for the well off, and the other subsidizes big government.

    We should end the federal student loan program for similar reasons. Its primary purpose is to subsidize waste and inefficiency, on the backs of naive college students, who get to play a few years as Eloi in exchange for decades as Morlocks.

  25. Any time the government tries to artificially manipulate a sector of the economy, it invariably affects other areas, as well.

    Free markets are rather good at evening the playing field, increasing effectiveness and inefficiencies. Is there a role for government? Yes. But it should be cautious in what it does. The $800+ Billion stimulus is an example of this. It didn’t keep unemployment from going over 8%, and probably helped push it over 9%. It “saved” a few million jobs, but at a cost of almost $300,000 each. That is money taken out of the private sector, which could have created jobs much cheaper and more effectively.

    Federal Student Aid program has created a welfare system among college students. As I’ve noted, it would be one thing to offer a loan or grant to students that equaled the amount to attend an inexpensive state college; but then leave to the student to obtain finances elsewhere to attend Harvard. Oh, and no in-state tuition for illegals, who are definitely not in-state residents….

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